High corporate tax rates produce adverse results

The latest Congressional Budget Office projects a 2016 federal deficit of $590 billion, larger than the deficits of the previous two years. The widening financial gap is said to be the result of weak corporate tax revenues and low productivity.

Given that the conventional wisdom from politicians has been to increase tax rates to drive up revenue, why are high U.S. corporate tax rates reaping less revenue, as a percentage of GDP, than low-tax economies? 

At 35 percent, the U.S. has the highest statutory corporate tax rate in the developed world. There have been no major reforms or reductions in the corporate tax rate since President Reagan slashed the headline rate to 34 percent in 1984. Since that time, the rest of the world has continued to lower rates to a global average of roughly 22 percent. 

As a result of the extortionately high U.S. corporate rates, many American corporations choose instead to invest overseas and register their headquarters in low-tax countries. At the same time, a larger proportion of business income is now earned by pass-through entities, meaning these firms can forgo paying corporate tax all together.

High tax rates create perverse incentives for investors to keep their money out of the U.S. while encouraging entrepreneurs to seek new avenues for tax avoidance.

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Corporate taxation in the U.S. has remained unchanged because politicians are determined to make corporations pay their “fair share.” However, the empirical research suggests that those hit hardest by higher corporate taxes are workers, through wage suppression, and shareholders, who are essential for capital investment.

An American Enterprise Institute study in 2011 found that a 1 percent increase in corporate taxation leads to a 0.5 percent decrease in real wages.

In addition, high corporate tax rates have a severe adverse effect on capital investment and entrepreneurship, two aspects critical to enhanced productivity. A World Bank survey examining the effects of corporate tax rates on productivity in 42 developing countries found that both investment and productivity responded negatively to an increase in the corporate tax rate.

The U.S. is a global loser in the race to abolish corporate tax. As a result, capital investment is lower, wages are suppressed, productivity is down, and the budget deficit continues to widen in the face of anemic corporate tax revenues.

The new administration could grow tax revenue by focusing on reforms that tackle low productivity and declining labor force participation.

The evidence is clear — the costs of corporate tax are extremely damaging to everyone, not just corporations. Perhaps the next administration will join the global race in abolishing this outdated burden.

Jack Salmon is a D.C.-based writer and researcher on matters relating to Federal fiscal policy. He holds an M.A. from Kings College London 

The views expressed by contributors are their own and are not the views of The Hill.